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Tapping into on-farm forestry

Property Brokers News Rural

Property Brokers 03 Feb 2020

Conrad_WilkshireTrees have the potential to enhance cashflow and underpin the long-term valuation of a farm as sustainable, integrated pastoral farming system, Conrad Wilkshire says.

In the modern era the farming sector has taken the opportunities market deregulation afforded it, both in terms of increased production and access to credit.

The wealth effect and contribution to exports have been nothing short of phenomenal.

Our pastoral sector is again set for significant financial gains off the back of the proposed Emissions Trading Scheme reforms and the ongoing sustainability of our production systems but, like most things, overnight success might take 10 years.

It is hard to contemplate a stronger forward outlook for sheep and beef producers, particularly given the shortening supply of livestock, continued growth in export receipts and competing land use options.

Our sheep and beef sector is probably the best example of doing more from less in the context of sustainable production.

Our national flock has halved over the last 25 years. You have to go back to the 1920s to equal where we are today at about 26.5 million sheep. Interestingly, actual kilograms of lamb production in the last 25 years has dropped only marginally (less than 5%) given gains with genetics and farming practices. 

The challenge facing our pastoral sector, ironically, is not deregulation but regulation, specifically the recent pre-Christmas announcements by Climate Change Minister James Shaw and the proposed revised settings for the ETS.

Over the last 30 years the sheep and beef sector has lost close to four million hectares to forestry, the conservation estate and dairying. 

Today pastoral sheep and beef farming accounts for about nine million hectares, half of which is probably not suited to pine production.

The plan for the balance is to take a further million hectares out of pastoral production in favour of forestry and, with the Billion Trees initiative as a mechanism, to help off-set a proportion of New Zealand’s carbon liabilities over the next decade.

There are potentially billions of dollars of future carbon credits on the table as the Government now proposes capping emissions at 2020 levels in combination with huge changes to ETS pricing, potentially doubling it to $50/tonne of carbon dioxide equivalent, as it looks to buy time to find alternatives to fossil fuels.

Near term this has the potential to create windfall gains for farmers already looking to exit the industry but for most farmers it has much greater opportunity over the next 10 to 15 years to generate new revenue streams inside the farm gate or provide options to scale the existing farm business. 

Our pastoral sector, when we look back, has done a very good job of navigating change and the country is better for it. However, the current rate of change and the regulatory nature of it, has raised a lot of very genuine concerns. 

Farming and forestry are not mutually exclusive. The North Island’s east coast and particularly Wairoa District have been challenged with this tension since the early 90s. 

With about 75,000ha already in forestry and another 7% of its pastoral area going to forestry in 2019 Wairoa will have more forestry than pastoral land inside the next five years, unless policy is moderated.

Having attended the recent Wairoa A&P show it is very clear farmers have actively participated in forestry and native planting over the last 30 years. 

The NZ carbon opportunity over the last 20 years has not generated the investment confidence it should have, given the uncertainty with successive government climate policy positions, notably ETS settings and the corresponding up and down nature of carbon trading.

Astute farmers have taken past opportunities to protect their carbon liability with cheap units over that time but regulatory pressure on the carbon price is changing the situation dramatically. 

There is nothing cheap in terms of the forward outlook for carbon and this could represent an opportunity as well as a threat for sheep and beef producers. On balance, carbon must be an opportunity for pastoral farmers.

Farmers control the land use and given the right planning tools and advice, planting less productive ground in carbon credit-generating forest estates has the potential to enhance cashflow and underpin the long-term valuation of the farm as a sustainable, integrated pastoral farming system, particularly as pressure continues to be applied to give greater incentives for native species.

Right now carbon is driving significant capital growth across large tracts of land from the far north to the deep south and while we remain very much in the business of selling farms we are also in the business of leasing them too.

For farmers who see the outlook as positive and want options to hold onto their land but take a step back from the day-to day-commitments of farming there are myriad strategies available to take advantage of this fast-changing outlook.

Livestock valuations at today’s record highs can release significant cash in favour of a change in strategy to lease the farm. Options to retire part of the farm to trees in combination with a pastoral lease can also be part of the mix. 

Ultimately, with good advice this has to be a better investment than a bank deposit. 

The options now are broader than simply exiting the industry and selling the entire property to trees though that will still be attractive to some.

Conrad Wilkshire is Property Brokers Rural general manager.